Chapter 4 Analysis of Financial Statements 117
a. Calculate those ratios that you think would be useful in this analysis.
b. Construct a DuPont equation and compare the company’s ratios to the industry aver-
age ratios.
c. Do the balance sheet accounts or the income statement figures seem to be primarily
responsible for the low profits?
d. Which specific accounts seem to be most out of line relative to other firms in the
industry?
e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the
year, how might that affect the validity of your ratio analysis? How might you correct
for such potential problems?
RATIO ANALYSIS The Corrigan Corporation’s 2007 and 2008 financial statements follow,
along with some industry average ratios.
a. Assess Corrigan’s liquidity position and determine how it compares with peers and
how the liquidity position has changed over time.
b. Assess Corrigan’s asset management position and determine how it compares with
peers and how its asset management efficiency has changed over time.
c. Assess Corrigan’s debt management position and determine how it compares with
peers and how its debt management has changed over time.
d. Assess Corrigan’s profitability ratios and determine how they compare with peers
and how its profitability position has changed over time.
e. Assess Corrigan’s market value ratios and determine how its valuation compares
with peers and how it has changed over time.
f. Calculate Corrigan’s ROE as well as the industry average ROE using the DuPont
equation. From this analysis, how does Corrigan’s financial position compare with
the industry average numbers?
g. What do you think would happen to its ratios if the company initiated cost-cutting
measures that allowed it to hold lower levels of inventory and substantially
decreased the cost of goods sold? No calculations are necessary. Think about which
ratios would be affected by changes in these two accounts.
COMCOMPREHENSIVE/SPREADSHEET PROBLEMPREHENSIVE/SPREADSHEET PROBLEM
4-244-24
Corrigan Corporation: Balance Sheets as of December 31
2008 2007
Cash $ 72,000 $ 65,000
Accounts receivable 439,000 328,000
Inventories 894,000 813,000
Total current assets $1,405,000 $1,206,000
Land and building 238,000 271,000
Machinery 132,000 133,000
Other fixed assets 61,000 57,000
Total assets $1,836,000 $1,667,000
Accounts and notes payable $ 432,000 $ 409,500
Accrued liabilities 170,000 162,000
Total current liabilities $ 602,000 $ 571,500
Long-term debt 404,290 258,898
Common stock 575,000 575,000
Retained earnings 254,710 261,602
Total liabilities and equity $1,836,000 $1,667,000
